1.14 Return for Deceased
When a person dies, another tax-paying entity is created—the decedent’s estate. Until the estate is fully distributed, it will generally earn income for which a return must be filed. For example, Carlos Perez dies on June 30, 2012. The wages and bank interest he earned through June 30 are reported on his final income tax return, Form 1040, which is due by April 15, 2013. Interest earned on his bank account after June 30 is attributed to the estate, or to the account beneficiary if the right to the account passes by law directly to the account beneficiary. Income received by the estate is reported on Form 1041, the income tax return for the estate, if the estate has gross income of $600 or more. If Carlos was married, his surviving spouse could file a joint return (1.10) for 2012 and include all of Carlos’s earnings through June 30. If she jointly owned the bank account with Carlos, the interest after as well as before June 30 could be reported on their joint return.
Planning Reminder
What income tax returns must be filed on behalf of the deceased?
If the individual died after the close of the taxable year but before the income tax return was filed, the following must be filed:
If the individual died after filing a return for the prior tax year, then only 2 and 3 are filed.
Who is responsible for filing?
The executor, administrator, or other legal representative is responsible for filing all returns. For purposes of determining whether a final income tax return for the decedent is due, the annual gross income test at page 3 is considered in full. You do not prorate it according to the part of the year the decedent lived. A surviving spouse may assume responsibility for filing a joint return for the year of death if no executor or administrator has been appointed and other tests are met (1.10). However, if a legal representative has been appointed, he or she must give the surviving spouse consent to file a joint return for the year of the decedent’s death. In one case, a state court held that a co-executrix could not refuse consent and was required to sign a joint return where it would save the estate money.
How do you report the decedent’s income and deductions?
You follow the method used by the decedent during his or her life, either the cash method or the accrual method, to account for the income up to the date of death. The income does not have to be put on an annual basis. Each item is taxed in the same manner as it would have been taxed had the decedent lived for the entire year.
If the decedent owned U.S. Savings Bonds, see 4.29.
When one spouse dies in a community property state (1.6), how should the income from the community property be reported during the administration of the estate? The IRS says that half the income is the estate’s and the other half belongs to the surviving spouse.
Deductible expenses paid (or accrued under the accrual method) by the decedent before death are claimed on the final return.
Filing Instruction
Medical expenses of the decedent.
If the estate pays the decedent’s personal medical expenses (not those for the decedent’s dependents) within one year of the date of death, the expenses can be deducted on the decedent’s final return, subject to the regular 7.5% of adjusted gross income floor (17.8). However, the expenses are not deductible for income tax purposes if they are deducted for estate tax purposes. To deduct such medical expenses on the decedent’s final return, a statement must be attached to the final return affirming that no estate tax deduction has been taken and that the rights to the deduction have been waived.
Partnership income.
The death of a partner closes the partnership tax year for that partner. The final return for the partner must include his or her distributive share of partnership income and deductions for the part of the partnership’s tax year ending on the date of death. Thus, if a partner dies on July 26, 2012, and the partnership’s taxable year ends December 31, 2012, the partner’s final 2012 return must include partnership items for January 1, 2012 through July 26, 2012. Partnership items for the balance of 2012 must be reported by the partner’s executor or other successor in interest on the estate’s income tax return.
Exemptions allowed on a final return.
These are generally the same exemptions the decedent would have had if he or she had not died (21.1). You do not reduce the exemptions because of the shorter taxable year.
Estimated taxes.
No estimated tax need be paid by the executor after the death of an unmarried individual; the entire tax is paid when filing the final tax return. But where the deceased and a surviving spouse paid estimated tax jointly, the rule is different. The surviving spouse is still liable for the balance of the estimated tax unless an amended estimated tax voucher is filed. Further, if the surviving spouse plans to file a joint return (1.10) that includes the decedent’s income, estimated tax payments may be required; see Chapter 27.
Where the estate has gross income, estimated tax installments are not required on Form 1041-ES for the first two years after the decedent’s death.
Signing the return.
An executor or administrator of the estate signs the return. If it is a joint return, see 1.10.
When a refund is due on a final return.
The decedent’s final return may also be used as a claim for a refund of an overpayment of withheld or estimated taxes. Form 1310 may be used to get the refund, but the form is not required if you are a surviving spouse filing a joint return for the year your spouse died. If you are an executor or administrator of the estate and you are filing Form 1040, 1040A, or 1040EZ for the decedent, you do not need Form 1310, but you must attach to the return a copy of the court certificate showing your appointment as personal representative.
Itemized deduction for IRD subject to estate tax.
Items of gross income that the decedent had a right to receive but did not receive before death (or accrue if under the accrual method) are subject to income tax when received by the estate or beneficiary. This “income in respect of a decedent,” or IRD, is also included in the decedent’s estate for estate tax purposes. If estate tax is paid, an individual beneficiary may claim an itemized deduction for an allocable share of the estate tax paid on IRD items; see 11.17 for deduction details.